After a relatively quiet few weeks the financial newswires have sprung back into life with positive US earnings surprises, another distressed US bank and an Australian inflation print that appears to have something for everyone.

Jonathan Ramsay and Jonathan Tolub discuss the upcoming Portfolio Construction Forum Finology Summit 2023, which will be on Wednesday May 3rd 2023. If you are interested in attending the Finology Summit live or online, contact Paul Carrington at [email protected]

Markets have been remarkably well behaved since Easter, as most markets are up by 1-2% across the board with very little volatility.

With many markets closed for a few days either side of Easter and market liquidity being generally very low, the financial news been mercifully subdued (including this weeks US CPI print). There was, however, mini-scare at the end of last week as a number of jobs related reports came out suggesting that the overheating US economy might be slowing down.

Markets have calmed down a great deal in the last two weeks and more recently have mounted a bit of a recovery, with US tech and emerging markets leading the way

Early last week a much-awaited inflation gauge in the US confirmed that inflation remained ‘sticky’, and that the pace of increases might even be accelerating again. For the second week in a row a hawkish and normally market moving Fed speech that should have seen yields go higher was overshadowed by events in the banking sector that had exactly the opposite effect

On Friday morning Silicon Valley Bank (SVB) had been the 16th largest US bank and a successful S&P 500 company, but by Saturday morning it was bankrupt after a sudden run on its deposit base had rendered it unviable.

Bond yields were up again last week but so were equity markets which was a nice change that lead to the first up week in the last four. In fact, while markets have been on the back foot recently, most commentators have been pleasantly surprised that they haven’t reacted too badly to an apparent wind shift in the gusty inflationary data.

On Friday the widely followed US PCE inflation data was published, and it tied a neat bow around this thesis with broad based inflation measures covering core as well as volatile items like food and energy higher than expected.Last week, the S&P 500 traded in a 3% range, having done a 2% round trip on Thursday, followed by a 3% fall on Friday after the inflation data release and then another almost 2% round trip yesterday. Emerging markets were the worst performing, down 4% for the week. Taking a step back though, most equity markets haven’t given back that much of their gains from January, while Europe and the Nasdaq remain up 10% for the year.

Markets followed a recently familiar path last week, rising early in the week on strong economic data and hopes of a ‘no-landing’ only to fall back as the market digests the inflationary consequences, helped by cautious rhetoric from various US Federal Reserve Board members.

A ‘no-landing’ scenario is one where the US economy just keeps flying high as inflation naturally subsides, thereby easing pressure on the Fed to kill the economy with higher rates. Ironically the main threat to the ‘no-landing’ scenario is, well, ‘no-landing’. The evident capacity constraints in the US economy and the fear of sticky, persistent inflation mean that the Fed needs and wants to slow the economy, even if inflation appears to be heading in the right direction.

Even if markets went nowhere it was the Nasdaq that moved most while there was also quite a lot of dispersion amongst the US tech titans. Tesla and Apple were the biggest contributors while Microsoft was the biggest detractor.

It wasn’t that big a move for Microsoft (down 5% in the last few days) but it coincided with news that its roll-out of Sydney (AKA BingChat) has encountered similar problems to Google’s AI the week before (which also undermined the parent company’s stock performance. Microsoft is still up the year but this underlined again that the adoption of so-called ‘large language models’ might not be a straightforward process for the large incumbent tech stocks and the disruptors could yet be disrupted.

European equities proved much more resilient while Japan flat lined and Chinese stocks were on the back foot. The results season in the US just surpassed very weak expectations while in Europe results have shown signs of outright strength and even a nascent recovery, especially amongst the banks.

In Australia there was similar level of noise around inflation and dispersion between stocks, albeit with a more industrial or bricks and mortar feel and the market was the weakest performer for the second week in a row.

This was mainly driven by CBA (down 7%) and the other local banks despite CBA reporting record profits. The underlying fear is that this is perhaps as good as it gets, reflected in the banks guidance that suggested that the increase in so-called ‘net interest margins’ (the difference between what the bank pays depositors and receives form mortgagees) had peaked.

CBA also highlighted that $96bn in fixed rate mortgages would reset higher this year an perhaps reflects a broader fear in the market that this might be as good as it gets for the local economy if the RBA is forced to tighten more than expected.